While looking around things on crypto-related websites online, you might have often heard the word ‘market capitalization’. It is an important part of the crypto vocabulary and relatively technical if you go into more extensive details. In a nutshell, market capitalization refers to the total overall size of a cryptocurrency and determines its significance in the overall market.
Why is Market Cap Important?
On a technical level, you can get the total market cap value by multiplying the current price of an asset with the number of coins in circulation. Market capitalization is often used as a measure to compare cryptocurrencies in terms of their substantiality. Have a look at the following table from coinmarketcap.com:
The top 10 cryptocurrencies with a bigger market capitalization are listed here for traders to notice changes in the prices vis-à-vis the circulation and make informed choices. It is usually perceived that a high market cap equates to high value of the coin, making it a very important aspect in investing decisions. Though, it is important to note that high market capitalization does not mean a higher money inflow.
Remember that market capitalization is a combination of two factors: price and supply. This means that the market cap may increase because of an increase in price, and the number of circulation of the coin. However this does not indicate the liquidity of the asset, which is a different aspect. You can learn more about liquidity, here.
Cryptocurrency market cap can also indicate the trend of the market. A rising market cap indicates a bull market, while a falling or decreasing market cap might indicate the onset of a bear market.
Total Crypto Market Cap
In recent years, the total market capitalization of the cryptocurrency market has taken a leap, making many people notice the growth of cryptocurrencies and participate in it more significantly. In that regard, the most notable year so far has been 2021. Towards the last quarter of 2021, overall cryptocurrency market capitalization reached its peak.
Even though 2022 has been a slow year due to many political as well as macro-economical reasons, it is possible that the crypto market could bounce back and according to TIME, many experts still say Bitcoin is on its way to pass the $100,000 mark by the end of the year. As a matter of fact, there is already a steady recovery in the market capitalization of cryptocurrencies. Since market capitalization and the price of coins are interrelated, when prices pick up momentum, market capitalization might also increase given that there is a steady or increased supply.
Have a look at the growth chart of the overall cryptocurrency market capitalization, taken from coinmarketcap.com :
In November, the total cryptocurrency market capitalization reached almost 3 Trillion USD, an exponential growth from its previous value. However, you might be curious how this overall market capitalization is calculated technically. Our next section will give you a clear understanding of this.
How is Market Cap Calculated?
The calculation of cryptocurrency market capitalization, as mentioned above, depends on the price of the cryptocurrency and the number of coins in supply. Let us look at the two factors individually.
The price of a cryptocurrency is determined by factors which are not the same as traditional money. Since cryptocurrencies are independent and aren’t controlled by any central figure, there is a difference in the way they derive value. However, today there are many countries adopting cryptocurrency as their legal tender. El Salvador, and the Central African Republic, are good examples of countries that allow consumers to use crypto for transactions.
The price of crypto depends on the following factors:
- Supply and demand: This is the most obvious aspect for the price determination of a coin. Cryptocurrency prices increase when the demand is higher than the supply.
- Cost of production: In the crypto world, cost of production refers to the gas fees or the costs incurred in mining the cryptocurrency. As mining costs increase, it means an increased value of the cryptocurrency is required. Miners won’t mine if they do not get rewarded more than the amount of input they have given into the process of mining. This includes the cost of electricity and computational power, etc. Since miners are essential to making the blockchain function, as long as there’s demand for using the blockchain, the price will tend to go upwards.
- Availability on Exchanges: A factor quite related to demand is also the relative availability of the coin on exchanges. For example, if a coin is listed on multiple cryptocurrency exchanges, it is more easily available therefore there could be an increase in the price as per increase in demand due to investor interest, all other aspects remaining constant.
- Governance: As mentioned above, government regulations could play an important role in increasing or decreasing the value and therefore the price of cryptocurrency. Historically, the prices of cryptocurrencies have fluctuated based on macro economic factors which also include the government’s stand on whether they find certain cryptocurrencies as important or unimportant.
- General Sentiment: Social media, financial platforms, magazines and other media platforms have always affected the price of cryptocurrencies whether positively or negatively. This is why sentimental analysis is an important part of overall price analysis. When the market is bearish, investors tend to be facing FUD (Fear, Uncertainty, Doubt). This further creates a risk-aversion. In a bullish market, the confidence is higher and therefore the price may soar due to increased investor interest.
In terms of cryptocurrencies, there are three types of supply to be considered:
- Fixed Supply is the maximum or total number of coins that could ever be in circulation.
- Total Supply is the number of coins mined. This includes coins that have been lost after being mined or lost via forgotten wallet keys.
- Circulating Supply is the number of coins that are currently active and circulating.
For the purpose of market capitalization, the circulating supply is taken into consideration. There is also a possibility that the relation between circulating and fixed supply may influence the price of a coin and therefore the overall market cap. For example, in the case of bitcoin, the fixed supply is known to be 21 million and there are almost 19 million are already in circulation at the time of writing (16.08.2022).
Here is a comparison of BTC market cap and its circulating supply. The data is taken from blockchain.com. When BTC reached a peak of $1.2 Trillion USD market cap, its circulating supply was also at the peak as compared to previous years.
When it comes to calculating the overall market capitalization of the cryptocurrency market, it is given by the sum of the market capitalizations of all cryptocurrencies that are active in the crypto market (in circulation).
Top Cryptocurrencies by Market Cap
1. Bitcoin (BTC)
Bitcoin, the first ever cryptocurrency, remains to be the reigning king of the crypto world despite recent slip offs in the price. The total market capitalization of BTC is $460,404,243,924. This is much higher than any of the altcoins so far. The reason for this is that bitcoin is a very popular cryptocurrency, and it is also considered a safe investment.
2. Ether (ETH)
If there is one cryptocurrency that is known to be rising fast and steady in terms of popularity and adaptability, it is Ethereum network’s native coin Ether. Historically, the Ethereum blockchain has been criticized for only one aspect: its high gas fees resulting in unviable usage. In September 2022 Vitalin Buterik is set to flag off the shift in the consensus system of the Ethereum blockchain from proof-of-work to proof-of-stake. This has resulted in even higher interest in the coin. The market capitalization of ETH stands at $232,076,486,013.
The popularity of stablecoin USDT is derived by its tendency to control volatility. In terms of stablecoins, the rise and fall in the market cap is usually because of the actual increase or decrease in the inflow of the coins. The current market cap of USDT is $67,425,965,436.
Smart contract blockchain Cardano’s coin ADA has been flying high and popular because of rising popularity. Cardano allows decentralized applications (dApps) to be created easily and it is popular within the developer community. The current market cap of ADA is $18,765,306,479.
Gaining popularity with its low fees, fast transactions and wide adoptions, XRP has maintained a steady growth over time. It currently stands at a market cap of $18,391,169,006.
Why is Market Cap Important for Your Trading Strategy?
Like stocks, cryptocurrencies can also be categorized into large, mid and small cap. Depending on which coin they invest in, the trader can choose a strategy that suits them.
Large-cap cryptocurrencies which are the biggies like BTC, ETH and ADA with a market cap over $10 billion are usually considered to be safe crypto investments. Investing in such coins is usually considered a less risky, more conservative strategy. They are great additions to your investment portfolio.
Mid-cap coins could offer a more adventurous crypto investment strategy. They are usually more volatile in nature and can be invested in, based on their utility and potential.
Small-cap coins are high risk alternatives for short-term gainers and fans of the scalping style of trading, building compound profits.
While there is always some amount of uncertainty related to cryptocurrencies, having the right knowledge can always help you create a safety net. It is rewarding to learn about market capitalization, especially in terms of cryptocurrencies since this knowledge could help you create better trading strategies. The more you know the more you grow.